Celesio sacks CEO - a two-way Opportunity window?

Today’s news that Celesio has removed its CEO, citing “different opinions of the management of the company”, coupled with a market capitalisation of €2.6bn (a snip!), represents a final opportunity for Hutchison Whampoa to bolt a global wholesale network onto its A.S. Watson/Superdrug retail arm and attempt to catch up and become a second global H&B player to Alliance Boots.

By the same token, given the abruptness of the move, and the inevitable temporary destabilising effect on Celesio, Alliance Boots have also been presented with an opportunity to race ahead in their quest for comprehensive global coverage and ultimate re-flotation…

Either way, H&B suppliers would benefit from a couple of ‘what if’ analyses (ideally with global colleagues) to explore the implications and their options ref global trade strategies....

Opportunities in Deflation-Inflation Mix as Shops Slash Margins?

Ambient foods NAMs may be encouraged at ingredient cost increases finding their way to shelf-prices, resulting in average price increases of 2.5%, according to latest figures available from the British Retail Consortium and Nielsen.

At the same time, key non-food categories have experienced significant shelf-price deflation as retailers slashed prices in attempts to drive sales in falling markets.
As an indicator of severity, non-food deflation rates were as follows:
- clothes and shoes, 6.7% cheaper
- furniture and carpets, 2.4% cheaper
- TVs, DVD players, fridges, washing machines and ovens, 4.7% cheaper

However, as most mixed-goods retailers operate portfolio businesses, in that their overall interest, and that of the stockmarket is in overall profitability, then increased food sales can become a means of subsidising losses in non-foods…. 

In addition, having ‘allowed’ food price increases, the retailer may be tempted to seek financial support from suppliers that appear to be ‘more profitable’ as a result.

Whilst experienced NAMs will no doubt draw upon their repertoire of ways of saying ‘no’ to requests for non-specific subsidies (See How to say ‘No’), it may be more difficult to explain net profit margins of 7%+ in a supplier’s UK Annual report, compared with the retailer’s 3% or less in their P&L (See How to justify your bottom line).

However, imaginative NAMs will see real opportunities in promoting ambient food as a traffic builder to enhance shoppers’ access to non-food bargain offerings, and also use related food/non-food purchases as a means of driving the impact of retailers’ sales of more profitable foods to the bottom line, and claiming credit for the strategy….

Getting the numbers right in Independent Retailer Month

Despite the obvious advantages of capitalising on the public mood in support of local retail, coupled with fuel  savings and ultimate dilution of multiples’ power, the actual return per outlet is usually too low to justify the necessary investment in independent retail.

For this reason, suppliers that rely on traditional financial measures of ROI will find it difficult to realise the full potential of local shops.

However, a simple shift in perspective can help.

Given that a local retailer can be more flexible in terms of meeting shopper needs, and with the right support can be more willing to encourage customers to engage with the product in the store, it remains for the supplier to find a viable financial formula in order to justify the investment required.

Suppliers that can take the creative leap into regarding the instore experience as part of marketing of the brand, not only making media investment more effective, but optimising a final stage on the way to purchase, with ‘hands-on’ contact providing an effective way of managing expectations, have to gain a competitive edge over those who focus primarily on the major multiples…

In other words, why not regard say 50% of the store-visit costs as part of the national media advertising budget, and thus make the sales per independent outlet vs. the ‘reduced’ instore-investment compare better with other uses of brand resources?

Independent Retailer Month provides an ideal opportunity to run the numbers on a 50/50 basis on current promo-programmes, evaluate the ROI results and take steps to focus more effort next year, while those already using this approach reap the rewards over the next four weeks….

High Street failure creditors owed £2bn – report

In a BBC article, financial analysts Company Watch found £499m was recovered in assets from the 19 biggest retail failures since 2012.

Banks and other secured lenders got at least £365m and about £123m was spent on fees and other bills. Administrators earned £33m from the failures, with some charging up to £950 an hour. Only £14m went to last-in-line unsecured creditors such as suppliers, landlords and customers, meaning a total loss of approximately £2bn.

To put that in perspective, assuming suppliers have an average 7% net profit margin, a loss of £2bn translates into incremental sales of £28.5bn in order to recover the loss…

Others can debate the merits of the insolvency laws, but for NAMs the issue has to be the reduction in at-risk retailers and wholesalers in the customer portfolio.

Essentially, as the frontline members of the supplier-retailer relationship, it is vital that NAMs optimise their unique advantage in being able to combine their closeness to and knowledge of, the  customer with latest financial results in order to pick up signals of deepening financial crisis and take appropriate action before the bankers, government and administrators line up outside the shop…

NAMs can underestimate their value at this stage. While others in the company have to rely upon historical data and press commentary on the customer, the NAM is unique in being able to ‘read’ the state-of-mind of the customer, today.

In order to optimise this advantage if is obviously essential that  the NAM understand the basics of Balance Sheet and P&L in order to be able to complete the insolvency jigsaw.

Some tips:
-  See cover charge indicator
-  Spotting the signs of trouble 
- Working around bankrupt customers

Failure to anticipate the ‘obvious’ means the NAM is saddled with the task of obtaining the incremental sales elsewhere…

'Making do' with existing space: the Tesco-Sports Direct space-partnership…

Sports Direct is in advanced talks to take excess space in some of Tesco’s biggest stores, possibly via the Mezzanine floors. Sports Direct would be able to benefit from the customer traffic to Tesco, and allow the grocery multiple to shed space to a non-competing retailer.

As you know, Tesco is already reducing floor-space. A 120,000 sq. ft. store in Stockton-on-Tees, for example, is to be reduced to 80,000 sq. ft. by installing a gym on the store’s mezzanine floor, and a children’s play area on the ground floor.

They are already comfortable with the Sports Direct connection (see the Czech Republic, where Tesco cut the size of a hypermarket from 80,000 sq. ft. to 50,000 sq. ft., with Sports Direct taking the bulk of the excess space).

Retailing being a pragmatic model, Tesco realises that a 100,000 sq. ft. store represents space overcapacity. Reasons are irrelevant. In the ‘here and now’ retailing is about alternative use or going bust, with retail margins too low to allow any other options. Tesco’s willingness to consider complementary space-partners, rather than plough on regardless, has to be the right attitude. The rest is detail…

Imaginative NAMs, particularly those in multi-channel categories, already see the potential of collaborative promotions involving Tesco’s space-partners. For instance the scope for healthfood/sports supplements joint-initiatives is a no-brainer…

The real opportunity
But the real creativity is in seeing that this space-partnership is not about ‘making-do’ with a large store problem. With care, this idea can be rolled out into Tesco’s other formats, via complementary partners in many other categories, all realising synergies in existing store traffic.

As always, change of this nature can represent threats and opportunities for suppliers. This means that any categories/brands that are currently ‘space-fillers’ become ‘de-listable’ as Tesco develops its space-partnership model, and, paradoxically ‘needs more space’ as the idea develops…. However, those NAMs that can go to Tesco with creative linkages involving complementary routes to consumer, and even suggestions for possible space-partnerships, have to represent added-value for both retailers…

In other words, it is time for a really fundamental review of what your brand  represents to your consumers, in their preferred shopping environment, in the context of the Tesco space-partnership concept, remembering that all creativity is simply the linking of two old ideas that have not been combined before….

State of the nation…

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome become bankrupt. People must again learn to work instead of living on public assistance."
- Cicero , 55 BC

So, evidently we've learned nothing in the past 2,068 years?

When the Buyer wants to negotiate via your local annual report

The growing sensitivity re. corporation tax compliance has made the issue of local profitability a talking-point, and thereby increased the possibility of challenges in negotiation.

B:   Following our last discussion, I downloaded a copy of your global annual report from your site and a copy of your UK report from Companies House, cost me £1, which I would like to see reflected in your trade terms…

S:   Fine, no problem with crediting you with £1, I can take it off the refund allowance because of your Hounslow branch non-compliance last month..Seriously, have you had time to read the reports?

B:   ...well a few things stood out: First, I had not realised that your UK operation was so small, it looks like we represent 45% of your business – we need a bit more support

S:   As it happens, a couple of our high-compliance partners are supplied direct from our French business, which helps them get faster replenishment. This means their purchases do not appear in our local figures. Incidentally, this is an option available to yourselves, providing we can tie down promotional execution a little better. Any other points you would like clarifying?

B:   Well it looks like you give an average 30 days credit in the UK, yet your global figures show 45 days, you seem to be taking advantage of your UK customers, and us in particular at just 28 days

S:   First of all, in common with many global operators, we offer different total packages I different countries including national average trade credit of 50 day in France, 90 days in Italy and 150 days in Greece!  But each country has different trade margins to compensate

B:   OK, explain our UK position

S:   As far as the UK is concerned, we can look at debtors in more detail.  Glad you have your calculator handy. I know you were in a rush before the meeting and you probably the Debtor figure of £7.5m off the P&L, and on that basis against our UK sales of £900m, we give an average credit of 30 days. [£90m/£7.5m = 12.    365/12 = 30 days]. But if you notice the Notes13 beside the Debtor figure and turn to that Note at the back of the accounts, it explains that Debtors of £7.5m is made up of Trade Debtors of £6.5m  and other debtors of £1m.

B:  So we are one of the Trade Debtors?

S:  Yep, and if you run the same calculation on that basis, it shows an average credit of 26.4 days, so you are getting a little longer to pay, with your 28 days average…

B:  The big surprise was your 9.5% net margin in the UK, vs. our margin of 3.4%, we need some of that

S:  I wondered how long it would take, but it stands to reason, given that it comes at the bottom of the P&L… You remember our pre-Christmas negotiation when we focused on relative profitability, well that that was when we agreed why the difference was down to our different business models  (See here)

Buyer:  I also notice that you are sitting on loads of stock, compared with this time last year, moving from a stockturn of 8 times a year down to 6 times a year, effectively 2 months stock [ sales/stocks = stockturn.    365/Stockturn = number of days stock]

SuperNAM:  Great, that’s really why I came to see you. We are building stocks of our new line because early response indicates a surge in demand.  Let’s discuss how we can use that to make us both some real money…

Adventures of SuperNAM (21)

The Amazon Economy - a checklist for NAMs

See this FT article on how Amazon is impacting key aspects of online and offline retailing... The FT offers links to in-depth treatment covering each of the following:

1. From warehouse to powerhouse (Analysis: a back office infrastructure provider)
2. How Amazon changed ecommerce (Interactive: simplifies shipping, handling and payments for small retailers)
3. The Bezos doctrine of ruthless pragmatism (Corporate culture: a modus operandi that is pragmatic, frugal and data-driven)
4. Amazon finds upside to sales tax payment (Delivery: paying local taxes a stepping-stone to building more warehouses for same-day delivery)
5. How a warehouse changed a town (Employment: creating thousands of UK jobs, at a price)
6. Amazon plays catch-up in digital media: (Competition: As books, music and movies have shifted from physical to digital, Amazon has achieved mixed results in defending its revenues from them..)

A must-read for NAMs: If you really want/need to understand the Amazon business model, links to each of the above six articles are available here.

Understanding Amazon means gaining an insight into how your role will play out in the future, because of, or in spite of, the Big A… 

P.S. Market valuation:  If you must go all the way, see the Amazon valuation calculator, a discounted cash flow model that helps illustrate how variations in key assumptions can change Amazon’s potential market value here